Flipkart, Tiger Global’s unlikely burden

Late last October, Sandeep Singhal, a co-founder at Mumbai-based venture capital firm Nexus Venture Partners, unwittingly pronounced e-commerce company Flipkart’s epitaph. At the close of a panel discussion in Bengaluru, Singhal remarked, in jest: “Effectively what we (venture capital investors) did is collectively spend $2-3 billion on educating the Indian consumer on how to use Amazon…” This week, the Flipkart that started up a decade ago in a two-bedroom apartment in Bengaluru and became the flag-bearer of the current generation of homegrown Internet start-ups, died.

A quick recap of what happened earlier this week. On Tuesday, Tiger Global Management, the secretive New York-based hedge fund that has pumped a reported $1 billion into Flipkart over the years and owns 30-33% of the company, formally took over the reins at India’s most celebrated Internet start-up. Co-founder Binny Bansal has been kicked upstairs to group chief executive officer barely a year after being appointed CEO. This followed a similar move in January last year when Sachin Bansal, Flipkart’s other co-founder, vacated the CEO’s post in favour of Binny Bansal and assumed the role of executive chairman.

With the two founders, who together own 14-15% of the company, effectively out of the way, the man in charge of Flipkart’s future is new CEO Kalyan Krishnamurthy. Krishnamurthy was a managing director at Tiger Global until December last year in addition to serving as head of category design organization at Flipkart, a role he was entrusted with by Tiger Global in June last year. Incidentally, this is the second time that Krishnamurthy has been parachuted into Flipkart by its largest investor. The first instance was in early 2013 when he got on board as interim finance chief.

CEOs appointed by investors or investor-CEOs, as is the case with Flipkart, aren’t unheard of in start-ups backed by venture capital investors. It is, however, a situation that is least preferred by investors. It usually signals a complete breakdown of the fabric of the company and more often than not has a negative impact on the return or profit that the venture capital firm may have hoped to harvest from the investment. As Tiger Global’s man inside, Krishnamurthy has the onerous job of recovering the hedge fund’s reported $1 billion investment in Flipkart to the extent possible.

That hasn’t always worked out so well in the Indian context. A good example in recent times is the Housing.com affair. About a year-and-a-half ago, the company’s investors led by Japanese Internet and technology conglomerate SoftBank Group Corp. took over the reins of Mumbai-based Housing.com, a property search and listings platform, after an ugly, months-long stand-off between the company’s founder Rahul Yadav and the board. Yadav was ousted from the company and the investor group brought in a professional CEO, Jason Kothari, to salvage their combined $120 million-plus investment.

This week, Housing.com merged with News Corp.-backed PropTiger in a stock-swap deal. The deal gives Housing.com’s existing investors SoftBank, Helion Venture Partners, Nexus Venture, Qualcomm Ventures and Falcon Edge Capital stakes in PropTiger’s Singapore entity. More interestingly, the deal values Housing.com at just $70-75 million compared to the reported $200 million-plus it was valued at back in 2014. The merger does give Housing.com’s investors another shot at realizing value for their money but it also extends their exit timeline beyond what they would have preferred.

It wouldn’t be unrealistic to assume that Krishnamurthy’s elevation to CEO of Flipkart may be aimed at dressing up the company for a future sale. It could be the best shot that Tiger Global has at salvaging its investment and its reputation as a start-up investor in this market. The hedge fund’s investments in unlisted start-ups in India, including Flipkart, are speculated to be in the region of $2 billion or more. That isn’t going to be easy. Despite sucking in close to $3 billion in private capital and its head-start in the business, Flipkart finds itself struggling against its fiercest rival, Amazon. Mint reported in December that Amazon more than doubled its India revenues to Rs2,275 crore ($342 million) for the fiscal year ended March 2016. Flipkart’s revenue for the same period stood at Rs1,952 crore ($294 million). Amazon’s India loss, however, ballooned to Rs3,572 crore ($538 million) from Rs1,724 crore ($259 million) in the previous year. Flipkart also more than doubled its loss to Rs2,306 crore ($347 million).

The problem for Flipkart is that Amazon has the resources and bandwidth to absorb its higher loss. The Seattle-based e-commerce giant has amassed a $5 billion war chest for the Indian e-commerce market and more than half of that is yet to be deployed. Flipkart, on the other hand, has not been able to raise fresh capital for over a year. To worsen matters, its valuation, a reported $15 billion the last time it raised capital, has been repeatedly marked down by a bunch of global mutual funds that own minority stakes in the company.

For Tiger Global, the valuation markdowns are a very serious problem. In the past, it was able to muster mega funding rounds for Flipkart from a variety of investors on the back of those billion-dollar valuations. But we live in a different world today and Tiger Global itself has been hard-pressed lately to lead mega funding rounds in several of its portfolio companies in India.

Why Flipkart, the start-up that set out to build India’s Amazon, failed is something for which the answers are not clear yet. The onus of its failure, however, lies as much with its founders’ inability to execute as with its investors who assumed that unbridled access to capital was all that it would take to win the market